4.9 Barriers to Development

Poverty Cycle

List of economic barriers

1. Economic inequality

2. Lack of infrastructure or tech access

3. Low levels of human capital (health or education)

4. Dependence on primary commodity production

5. Lack of access to international markets

6. Informal economy

7. Capital flight

8. Indebtedness

9. Geography (landlocked or tropical climate and disease)

List of political and social barriers

1. Weak legal system

2. Ineffective taxation

3. Weak banking system

4. Weak property rights

5. Gender inequality

6. Lack of good governance

7. Unequal political power

Limited access to infrastructure and technology

• Misallocation of resources - provided infrastructure is inappropriate given the needs of the population

• Access to infrastructure is also limited in terms of access to the poor

• Limited resources in developing or purchasing technology to improve efficiency and production capacity

• Improved tech can also increase production, but may lead to unemployment due to capital deepening.

Low levels of human capital

Barrier to education

• Lack of funding and lack of quality materials

• Inability to pay

• Gender or racial discrimination

Barrier to healthcare

• Lack of funding and lack of access to medical services

• Poor sanitation/hygiene and access to clean water

• Insufficient medical facilities

Dependency on primary sector production

• Inelastic and price volatility

• Benefit developing countries when prices are high, but may wreck developing countries when prices fall.

Limited access to international markets

• Due to limited infrastructure or geography

• Developing countries’ currency may be non-convertible

• Barrier to entry: protectionist measures in a developed country

Informal economy

• Workers lack social protection, workers rights, and decent working conditions.

• Government does not gain tax revenue

• Lower HDI scores and high levels of informal employment

Capital flight

Large scale transfer of privately owned capital to other countries, caused by economic or political instability, which may cause depreciation due to higher supply.

High levels of indebtedness

• Exacerbated by volatility in primary commodity prices, global financial crisis, and the fact that debt is usually issued in USD

Dollar dominated debt:

• buy dollar using currency (that is usually valued less)

• Trade resources (give up national debt)

Geography

Landlocked countries

• Poor transportation infrastructure

Tropical climate and endemic diseases

• Reduce labor productivity and agricultural production

• Tropical diseases negatively affect human capital (health)

Weak legal system and property rights

Applies justice equally

If people do not have ownership or protection of property, they are not incentivized to produce!

Ineffective taxation structures

Loss of tax revenues prevents the government from investing in human capital and infrastructure.

High levels of tax evasion and corruption

Dependence on indirect taxation

Banking system

Incentive to save and source of credit or loans for individuals and businesses

Hindrance: poor individuals do not have collateral to collect credit

Foreign banks in developing countries only cater to large businesses focused on profit.

Gender inequality

Results in unequal participation in labor force and access to health care.

Benefits of empowerment of women:

• improves family health

• contribute to production and pass on their skills to their children

• Improved standards of living due to greater income

• Lower birth rates, education, and population growth

Lack of good governance

Corruption (abuse of public office for private gain)

• Bribery

• Embezzlement

• Extortion

• Fraud

• Patronage

• Influence peddling

• Nepotism

Lack of accountability of government

Government spends a lot of large scale projects

Negatively affects growth and development

• Reduce efficacy of legal system ad increases costs and prices

• Environmental damage and poor worker safety

• Damages trust in institutions and governments

• Disincentivizes FDI